What is the difference between restricted and unrestricted funds?

Applies in: England and Wales · Scotland · Northern Ireland

Fund accounting is a SORP requirement and the SORP is UK-wide, so the accounting is the same everywhere. The powers to release an endowment are England and Wales law; Scotland uses a different OSCR consent route for the same ground, and how Northern Ireland’s own endowment power works is not established here.

The accounting for restricted and unrestricted funds is the same in England and Wales, Scotland and Northern Ireland. That holds whether the charity reports to the Charity Commission, OSCR or the Charity Commission for Northern Ireland.

A restricted fund is money the charity may only spend on a narrower purpose than its own objects. The limit comes from the terms on which the money was given. An unrestricted fund is everything else: money the trustees may apply to any of the charity’s purposes. A designated fund is not a third category.

The difference matters to every charity that has ever received a grant, run an appeal, or been left a legacy for a named purpose.

Is a designated fund a restricted fund?

A trustee designation is not a restriction, and treating it as one is the most common fund accounting error there is.

Both are shown as separate funds in the accounts, so they look the same. They are not. The difference is who imposed the limit:

• A restriction is normally imposed from outside — by the donor’s terms, or by the terms on which an appeal was launched. The trustees cannot lift it at will: releasing or changing it needs a legal power.
• A designation is the trustees’ own decision. They resolve to set money aside for the new minibus. They can resolve tomorrow to spend it on salaries instead.

Both show up in the notes. Where a charity uses a legal power to lift a restriction or amend a restricted fund’s purposes, the SORP requires the notes to give it. The same applies where endowment is converted to income. For a designation, the SORP requires the notes to give the planned use and to say that the trustees can remove it.

Get it the wrong way round in either direction and the accounts mislead.

Reporting designated money as restricted overstates the charity’s obligations and can understate its free reserves, the figure funders and the regulator look at hardest. Reporting restricted money as unrestricted does the opposite. And if the money is then spent outside the restriction, that can amount to a breach of trust.

A restriction normally rests in law on what the donor intended or the terms of the appeal, not on an internal decision. If you cannot point to a document that created the restriction, you may not have one.

Where does a restriction come from?

A restriction comes from the terms on which the funds were given. That means the award letter, the funder’s terms and conditions, the wording of the appeal, or the will. Read those terms before you code anything, and keep them. You have to be able to show the restriction, not just remember it.

Reporting spend against each award is covered in set up restricted fund tracking for the award.

Two practical points from the steps that build this:

• Fund accounting belongs in the ledger, not in a separate memo. Keeping restricted funds in a note works while there are one or two grants. Then it stops working. The fund analysis in the accounts must reconcile to the ledger. That is one of the things a regulator tests. In the Charity Commission’s last review of this, about one in five of the smallest charities failed to account for charitable funds properly.
• Every transaction carries two codes — a nominal code and a fund code — so restricted and unrestricted money cannot be mixed by accident. That is what build your chart of accounts sets up.

Is a restriction the same as a condition?

No: a restriction limits how money is spent, while a condition decides when the income is recognised. This is a separate question from designation.

A restriction limits how the money may be spent. On its own it does not delay recognition. The income is recognised, into a restricted fund.

A performance-related condition is different. Where a grant sets specified future performance conditions, income is recognised only as those conditions are met. A liability is carried in the meantime.

Take a two-year grant for a named post, paid up front. Its terms set the level of service the post must deliver in each year. At the first year end it produces a liability, not a restricted fund balance.

Recognising the whole grant on receipt because the cash has arrived overstates income. Gross income drives every threshold test on the site, so it distorts those too.

Whether a grant is an exchange or a non-exchange transaction is decided by its substance.

Where the charity receives the grant in exchange for goods or services, under a contract between the parties, the SORP requires exchange accounting. Where the grant-maker does not directly receive equal value in exchange, the SORP requires non-exchange accounting. A grant paid to secure particular goods or services may still be shown as income from charitable activities.

The label on the award letter does not settle it. A government grant to carry out certain activities can fall on either side, depending on who receives the value. Apply the SORP’s own test to your award and record your reasoning. One thing is clear. The SORP does not allow the FRS 102 Section 24 accrual model for government grants. The SORP requires the performance model for all grants.

Endowment and the threshold answers

Endowment is capital the charity holds. Permanent endowment is, in the statutory definition for England and Wales, property “subject to a restriction on being expended which distinguishes between income and capital”. Expendable endowment is capital the trustees have a power to spend.

Endowment has an effect most treasurers do not expect. It moves in and out of the gross income figure in both directions. The statutory definition of gross income for England and Wales works like this (the full test is in determine which accounts to prepare):

• endowment received in the year is stripped out of gross income
• endowment converted into income funds during the year is added back

Some charities read “total income” off the face of their statement of financial activities and use it for a threshold test. If the charity has endowment movements, that figure will be wrong one way or the other. This is the most common technical error in the whole threshold area.

The Scottish definition differs in ways that matter, and it sits in regulations, not the Act. It excludes “the receipt of any donated asset in a permanent or expendable endowment fund” on the face of the definition.

Releasing or borrowing from permanent endowment (England and Wales). Permanent endowment is not locked away for ever. Three powers let trustees release or borrow from it, and two things about them are often described wrongly:

• The small-fund power (s.281) now reaches incorporated charities. It used to be limited to charities that are not a company or other body corporate. The Charities Act 2022 removed that limit, so CIOs and charitable companies can use it. Most published content has not caught up. A trustee resolution is enough, and no consent is required. The test is that the trustees are satisfied the charity’s purposes could be carried out more effectively as a result.
• The larger-fund power (s.282) is not “Commission consent”. Calling it that misleads. It is notify-and-wait. The trustees send the resolution and their reasons to the Commission. The Commission has a set period to concur or object. That period can be extended if it directs public notice or asks for more information. If it concurs, or the period ends without objection, the release takes effect. Silence is enough. That is not the same as the provisions where a change has no effect without written consent. The market value figure that selects between the two powers is on record but, on purpose, not repeated here.
• Trustees now have a borrowing power (ss.284A–284D). They may resolve to borrow up to a permitted amount from an available endowment fund. Arrangements must be in place to repay within the statutory period. Borrowed amounts leave the fund and its restrictions while borrowed. Trustees who can see they will not be able to repay must apply to the Commission for directions.

Scotland does not use these provisions at all. Restricted and endowed funds there are reorganised, not released, through OSCR’s own consent route, set out in the section “Jurisdiction: what differs”.

Northern Ireland has its own power to release permanent endowment (Charities Act (Northern Ireland) 2008, ss.123–130, in force). How it works was not researched for this page. Do not read the England and Wales position across.

What if restricted funds cannot be spent as intended?

Two situations come up often, and neither has a comfortable answer.

The charity cannot do what the grant was for. Repayment may be on the table, and the unspent balance cannot simply be redirected. Talk to the funder before you spend anything else; the funder side is covered in what happens if we cannot spend a grant.

The charity is closing. “We will use the restricted grant to cover the wind-down costs” is not a safe default. Restricted funds cannot simply pay for closure — see settle liabilities and deal with restricted funds.

Misapplying a restricted fund risks a breach-of-trust finding against the trustees personally, on top of whatever else is going wrong. That risk does not go away because the charity is incorporated.

A statutory power can relieve a trustee who “has acted honestly and reasonably and ought fairly to be excused”. But it expressly does not reach personal contractual liability. For trustees of an unincorporated charity facing leases, employment contracts and supplier bills, that is the exposure that matters.

Treat the point about restricted funds on closure with care. The regulator guidance is quoted directly. But what happens to restrictions in a formal insolvency rests on the main professional view, not on a statute or a case read directly.

Changing what a restricted fund may be used for brings in the cy-près rules and the regulator’s power to make schemes. That is covered in change your charitable purposes, not this page.

Jurisdiction: what differs

The accounting is the same in all three jurisdictions: fund accounting is a SORP requirement and the SORP is UK-wide. What differs:

• Scotland — the gross income definition differs, as set out under “Endowment and the threshold answers”. OSCR also adds an express exclusion for agency and pass-through money with no direct England and Wales equivalent. Scotland does not use the England and Wales endowment-release powers. Restricted funds, including permanent endowment, are reorganised through OSCR’s own consent route instead. That route is available where the charity cannot find out the donor’s wishes. It changes a fund’s purpose or conditions of use. OSCR’s own guidance says plainly that it does not let a charity use a restricted fund to pay general closure costs. Where a grant itself has failed rather than the charity closing, the same statutory route applies, described from that angle.
• Northern Ireland — the same SORP treatment, and the statutory gross income definition is word for word the same as in England and Wales. Northern Ireland has its own power to release permanent endowment (Charities Act (Northern Ireland) 2008, ss.123–130, in force). This page did not research how that power works. Nor did it research whether Northern Ireland has any equivalent to the restricted-funds reorganisation route in Scotland and in England and Wales. Do not read the England and Wales position across.

What to do about it

• Step 2 — Build a chart of accounts that separates restricted and unrestricted funds. This step puts everything above into practice. Until every transaction carries a fund code, the split exists only in your head.
• Step 8 — Record your first restricted grant correctly, when the first award letter arrives. Read the conditions before you code anything.

Then Step 16 — Calculate your free reserves, which is where the restricted-versus-designated distinction shows up in a number anyone can see.

This is information, not legal advice. Where restricted funds are already committed, a charity is closing, or a funder is asking for money back, the point at which you need someone is now — and before any paid route, the regulator, LawWorks and Advocate, and your local council for voluntary service all answer questions for free.